Real estate and infrastructure agents will have to review their positions on claiming input tax credit (ITC) following the Goods and Services Tax (GST) Council’s decision to retroactively amend the GST law to restrict ITC on construction services. It is also necessary to see if the retroactive decision is challenged in court.

The decision was taken by the GST Council in its 55th meeting in Jaisalmer on December 21 in the context of the Supreme Court judgment in the Safari Retreats case. In effect, the decision overturns the Supreme Court ruling in October in which it applied the “functionality test” to determine the availability of tax credit while admitting that the definition of “plant or machinery” has to be considered different from “plant and machinery”. The ruling was expected to provide relief not only to real estate developers but also to companies working to build infrastructure projects.

Sivakumar Ramjee, Executive Director of Indirect Taxes, Nangia Andersen, pointed out that the Supreme Court’s judgment in the Safari Retreats case addresses whether immovable property, especially commercial properties such as shopping malls intended for rent or lease, are eligible for the ‘ITC. “Real estate companies were not allowed to claim input tax credit (ITC) on GST paid on inputs and input services used in the construction of properties for their own use, until and all if such properties were rented out, under Section 17(5) (d) of the CGST Act,” he said.

According to the GST Council’s decision, the retrospective amendment would be carried out with effect from July 1, 2017 to amend a “drafting error” in the law.

“To align the provisions of section 17(5)(d) of the CGST Act, 2017 with the intent of the said section, the Council has recommended to amend section 17(5)(d) of the CGST Act, 2017 to replace the phrase “installation or machinery” with “installation and machinery”, retrospectively, with effect from 01.07.2017, so that the said sentence may be interpreted as per the Explanation at the end of Section 17 of the CGST Act, 2017,” an official release said after the meeting.

Sivakumar pointed out that the GST council’s proposal to retrospectively amend section 17(5)(d) to include the phrase “plant and machinery” may not be correct as the term “plant” and the term “machinery” are slightly different “According to the functionality test laid down by the Supreme Court, the mall could be considered a ‘plant’ from various judgments on direct taxes in the context of depreciation. The government should not brush it aside by labeling it of writing error”, he stressed.

Experts also believe that the amendment will have a major impact on all these players, many of whom had claimed ITC in these cases.

Saloni Roy, Partner, Deloitte India, pointed out that the amendment essentially seeks to overturn the Supreme Court’s ruling, which will require the industry to review its position based on recent case law. “The Safari Retreats decision was hailed because of the beneficial wider interpretation of plant and machinery by introducing the functionality test. On the basis of the joy of the industry, the decision of the Supreme Court in the Safari retreats are short-lived,” he said.

Gyanendra Tripathi, partner and leader (West), Indirect Tax, BDO India said the decision would not be welcomed by the industry at large. “After the decision, many companies had claimed ITC related to the construction of some property (qualifying as plant) during the past period and did not use it in many cases. Now all this ITC would have to be reversed,” he said.

It would be interesting to see if such a retrospective amendment, specifically to set aside a SC judgment, is challenged in the Court and the fate of that challenge.